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Managing the Contract Manufacturer: Is Your Product Ownership at Risk?

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Product development with a contract manufacturer can seem like a good choice for a start-up company. Low or no-cost engineering in exchange for the manufacturing contract is an attractive incentive for companies on a shoestring budget. But how do you protect yourself and retain ownership of your medical device product development?

First, understand that a contract manufacturer is far more interested in manufacturing your product than in developing it. Development is often not their ‘A’ skill set, and over the years we’ve had many clients who have had to extricate themselves from a contract manufacturer that was not capable of completing their product development. They also then discover the extent to which their contract manufacturer, and not their company, owns their product development.

In order to meet quality regulations with your medical device, you have to have a spec developer. If you sign over spec development to a contract manufacturer, you no longer have true ownership of your device. It becomes very difficult to extract your development if you want to move it, and equally difficult to move to a different manufacturer.

If a contract manufacturer develops your device, they are responsible for everything related to regulatory control. In one extreme experience, we had a client who had been doing development with a contract manufacturer and was literally locked out of the building, their product development held hostage, and we had to negotiate a pay-out to extricate the client’s device.

Contract manufacturers are not typically transparent with the client with regard to manufacturing processes for the client’s product, making it impossible to replicate the work elsewhere. Often they will include processes they hold the patent for in your device, and then you will have to pay them royalties on top of your manufacturing costs. This adds to the difficulty of moving your product to a different, or second, manufacturer.

Design adjustments can also be difficult, especially if your changes don’t fit the contract manufacturer’s capabilities. Remember, if you haven’t yet developed your product, there is no way to know which contract manufacturer will be best. And allowing the manufacturer’s capabilities to drive your design is almost certain to result in an inferior product.

Just imagine how a potential acquirer might view these complications. A large company looking to purchase, or even invest in, your start-up might look ahead to moving the product to one of their own manufacturers, or to the need for second-source manufacturing. If you have entangled your start-up with a contract manufacturer, a potential acquirer will need to consider the cost of the buy-out clause.

With outsourced medical device product development at REV.1 Engineering, you hold the cards. You are the spec developer of record, and REV.1 is your R&D team. With REV.1, our development goal is to create the best product, not the product that fits a narrow band of manufacturing capabilities. (Click here to read more about the importance of transparency in R&D consulting.)

As the R&D team for ASI, for example, REV.1 Engineering developed the device and then helped ASI find the specialty manufacturing they needed for their product. Rather than finding themselves locked into one manufacturer, ASI was looking at competitive bids from a variety of contract manufacturers. This significantly lowers cost over the long haul, and makes you far more flexible in taking your product to market.

If you’re a start-up company with big dreams for your medical device, don’t give away ownership of your device’s development. With REV.1, we’ll protect your interests and get your device moving … 2x Faster than if you tried to build an in-house team. Give us a call at 951.696.3933, connect with us on LinkedIn, or send us an email at info@rev1engineering.com, and let’s get your start-up funded or acquired.

Eric & Phil